Monthly Archives: May 2015

I was recently lucky enough to attend an excellent economic summit held in Athens to discuss what can be done about Greece’s endless economic downward spiral. I had gone to the event mainly as an exercise in educating myself, but being a freelance journalist who constantly looks to turn everything into a story (that’s how I make my living after all!) I pitched it to a few places beforehand and the news branch of Vice.com showed an interest.

Due to word limit restrictions and a tight deadline, plus changes to match Vice’s style and format, the edited final product of that article appears here.

My original version appears below and gives a shout out to the organisers of the event who did a great job. Why is this important? Because in the midst of one of Europe’s worst economic downturns, the people living through it, Greek citizens, rarely if ever get access to this level of debate, and that too for free.

There was so much material to work with, it was in the end very hard to choose what to include in the article and what to leave out. I was fortunate to briefly speak to Mr Sargent himself, as well as a few other speakers. Considering the points of view exchanged, I really feel it should have been compulsory attendance for everyone in the Syriza government!

Below is my original version which covers in a bit more detail the events of Tuesday’s summit.

Original version:

Emergency Economic Summit held as Greece faces Cash Crunch

Nobel Laureate Thomas J. Sargent called Greece’s crisis and others like it the macroeconomics of broken promises at an emergency economic summit held on Tuesday in Athens to discuss how to break Greece’s continuing economic crisis.

The government last week made a scheduled EUR 774 million payment to the IMF and is now desperately short of cash. Greece is lobbying to release more funds with little success. Leaked reports that European Commission leader Jean Claude Junker asked to allow Greece some breathing space have been denied by the Commission.

Mr Sargent was one of several speakers invited to shed light on Greece’s economic mistakes and possible solutions. Comparing Greece’s current situation to the American Civil War debts, he said was keen to know what Greek Finance Minister Yanis Varoufakis plan B was if the country’s creditors refused to see his point of view.

The finance minister made a brief appearance at the summit and said in his keynote speech: “For the last five years we’ve been going from bailout to bailout, loan to loan, crisis to crisis.”

“We have refused to sign on the dotted line because it’s not a solution to throw good borrowed money after bad borrowed money simply to keep pretending that the crisis of insolvency is a crisis of liquidity as we’ve been doing since 2010.

Talking about the next steps, Mr Varoufakis said: “We need to see how can we use public assets through privatisation and incorporating public assets with a developmental bank that will create the investment flows and bring in investment from the private sector.

“What we are trying to do with these negotiations is to get the other side [the troika] to remove itself from a failed logic which they know has failed but can’t acknowledge for political reasons, while at the same time acknowledge that Greece, if it doesn’t reform itself seriously, is not going to recover, whatever macroeconomic miracles we pull out of a hat.” he concluded.

In his closing statements, Mr Sargent commented that he would have liked to have debated some of his points with Mr Varoufakis, who left immediately after his keynote speech in a flurry of media attention. A disgruntled audience member responded saying “That’s his fault,” to applause.

The Nobel Laureate told Vice he had accepted the invitation to attend to learn from the panel of guests and because of Greece being a key factor in what happens next with the single currency.

“Greece is right at the centre of destiny of the Euro, not whether it survives but what it will look like as it survives.” said Mr Sargent.

Alexander Skouras, Associate Director of Institute Relations at the Atlas Network told Vice: “There is a need to hear the intellectual, the practical and the political argument for reform and we hope that the Greek public and the Greek political leaders today had a chance to hear that.

“This situation [in Greece] has driven away discussion from the real economy which can only improve if we succeed in implementing structural reforms.

With that in mind we invited some of the most prominent successful reformers from countries that can relate to Greece.”

A common theme among speakers was the urgent need for structural reforms to tackle Greece’s public sector, culture of corruption and to promote privatisation and a free market economy where doing business is easy and transparent, almost none of which Greece’s previous or current governments have addressed.

Several of the speakers warned starkly against the much-touted scenario of a Grexit – Greece leaving the single currency – including Professor Nicholas Economides of the Stern School of Business, New York.

“Greece has three options: the first is for greece to default and leave the Euro, the second is for Greece to default and remain in the Euro and the third is for Greece to reach an agreement with the EU.” said Professor Economides.

“The first, Greece’s exit from the Euro is a huge catastrophe. I’d say it’s as big as the Minor Asian catastrophe. We’re talking about an enormous bank run as a result, no confidence in the new currency, poverty much worse than we’ve already seen, lack of basic items such as medicine and petrol. I hope we never reach this scenario.”

Lajos Bokros, former Hungarian minister of Finance pointed to Vladimir Putin’s rise to power as a consequence of Russia’s 1998 default, a government that Syriza is keen to get closer to as other sources of funding close off one by one. “The cost of default is enormous. Default is the most costly scenario, it is austerity with no end.” said Mr Bokros.

Former Finance Minister of El Salvador, Juan Jose Daboub, said that while Greece’s crisis appears unique, it is not in the context of Latin American economies where such crises crop up every five years or so. He pointed to Argentina, Mexico and Brazil as repeat offenders. Additionally, he mentioned a lack of strong leadership in Greece in all areas from the state to the church and the army as one of the country’s weaknesses.

As the audience, largely made up of members of the public, listened and asked questions, the sense of urgency and frustration at lack of progress by Greece’s current and previous governments was tangible. Audience members were quick to tear down New Democracy’s Kyriakos Mitsotakis’ comments about the cuts his government made to the public sector.

A question about the true nature of the public sector reductions which Mr Mitsotakis presented to the forum – the numbers were achieved in part by pushing staff into generous early retirements or into a pool on 75% pay until they were hired elsewhere – was cut off by applause from the audience before it could be finished. Greece’s public sector is protected by its constitution which some say is a barrier to reform.

Greece’s next payment of EUR 305 million to the IMF is due on June 5th. Out of cash and with no deal in sight, the government said on Wednesday that the payment would not be possible without a deal with its creditors.

Fugu is a Japanese dish made from a highly toxic type of pufferfish. The sushi chefs who prepare the dish train for years in the fine art of how to precisely dissect the fish so as to avoid the poisonous parts contaminating the rest of the flesh.

When prepared correctly, fugu is considered a delicacy and its sale is tightly controlled. The toxin that the fish contains is fatal if incorrectly prepared, but when done right, just the tiniest amount of the toxin is allowed to remain in the flesh of the fish, which aficionados say imparts a tingling sensation in the mouth and a feeling of nirvana.

So basically, if you know what you’re doing, really know what you’re doing, you can take a lethal fish and turn it into something extraordinary, something that is an asset. You’re the culinary alchemist that turned poison into gourmet.

Likewise with Greece and the country’s current economic situation. Looking at the country, you’d think that with its never ending bailout programme, constant credit downgrading and general volatility, no one in their right minds would invest in Greece. That toxic fish? Who in their right mind would want a slice of that? Throw it back in the sea! But you’d be wrong.

Following the laws of physics where nothing occurs in a vacuum and the notion of cause and effect, markets move in two directions, and when that direction is down, someone is still making money. If it wasn’t so, the entire world would follow suit when an economic collapse occurs.

Just recently, veteran investor Mark Mobius, who also manages the emerging markets fund at Franklin Templeton Investment, advised that Greece was still a good buy. “From a long-term perspective, there is an opportunity to invest in companies that are undervalued and provide good upside.” he said.

He’s not alone in this view. Since the start of the crisis, and even more so since the elections, hedge funds in particular, those high-risk, high-gain cowboys of the investment world, are showing a lot of interest in Greece. As stock and bond prices go down, they’re the ones who’ll be moving in, and who knows, they might just end up laughing all the way to the bank.

The fact is that if you know what you’re doing and if you know what you’re looking for, even an apparent economic basket case like Greece can still be worth investing in, especially at the current low asset prices. When economic performance is so poor, surely the only way is up. In April this year, Mark Hulbert was one of the voices advising just this strategy when applied to Greek equities in his column for MarketWatch.com.

Stocks don’t trade into an abyss. When traders are dumping stocks, they don’t evaporate into thin air. Someone somewhere is buying them. Those people are the ones who have a bigger appetite for risk and could find themselves in possession of some prime investment cuts when Greece’s situation improves.

Back to our little pufferfish sitting on the chopping board. Think of this toxic little fish as investing in Greece. The opportunity is in front of you and now you’re wondering what the hell you’re supposed to do with it. One wrong move and the poison will seep into everything. Get it right and you’ve got yourself a one-way ticket to glory.

If you’re in the position of the investment equivalent of the nervous chef, standing over a pufferfish that’s eyeing you back with its dead, glazed over, junk status of an investment opportunity and wondering where to make the first cut, step back. Take a breath and consult the experts. Because they do exist, and in going against the grain with their advice to buy Greece, they can’t all be crazy.

Investing in Greece. Not for the faint hearted, but a fruit that’s tempting to the right sort of investor. Take a bite, if you dare. Just make sure your blade doesn’t slip when you finally make your decision.

Inspiration for this post came after writing in the National about Greece’s investment opportunities, here and here.

About 10 years ago, there was a famous case involving a routine procedure that went horribly wrong. A mother of two went into hospital to have a simple nasal procedure. Moments after the anaesthetic was administered, doctors discovered they were unable to establish an airway.

We’ve all seen this procedure in television medical dramas. It’s supposed to take just a few minutes. In this case, a very rare complication arose and the patient’s airway was obstructed. No matter how hard they tried, the doctors failed repeatedly to intubate her and get vital oxygen flowing to her organs again.

As the minutes ticked by, it was clear that panic had set in. There were three doctors in the room, and despite obvious alternatives, they were so focused on this one technique, on succeeding in getting the intubation done that they could not see past that one approach even when it was clearly not working.

Three experienced nurses who were also in the room, however, soon recognised that something was badly wrong. One of the nurses fetched a tracheotomy kit and let the doctors know that it was available. She stood by with the kit as they ignored her repeated attempts to announce it as a suitable alternative. The kit was never used, and the airway was never successfully established.

The patient suffered severe brain damage due to the lack of oxygen over 20 minutes and her life support was switched off several days later.

This tragic story illustrates what happens when those in charge doggedly focus on one approach when it’s clear that it’s not working instead of thinking of alternative solutions, or listening to better suggestions. When panic sets in, it can make even rational people act in bizarre ways that lead to disastrous consequences.

So too is the case with Greece and the country’s bailout programme. Last week, Greece’s debt to GDP ratio hit an all-time high of 177.1%. The bailout programme that was supposed to save the Greek economy has obliterated it, and austerity has caused the debt to go up rather than down.

It’s time to state the obvious and say that austerity has not worked. Five years in, it is an approach that has created a horrendous social disaster, ruined the Greek economy and continues to stretch off far into the horizon with no end in sight.

Despite obvious proof that austerity has failed spectacularly, it’s surprising then that no one has come up with any sort of viable alternative, and this is the only solution still being pushed on Greece by its creditors.

Let’s break it down in simple terms. When you borrow money, you are rightly expected to pay it back. Greece is not saying they refuse to pay. But at what point does a debt become completely unsustainable? When people get into severe debt, they either have to declare bankruptcy (default on their loan) or are given help in restructuring their loan against their available resources to create a viable repayment plan. We’re still waiting for that in Greece.

After an abysmal Eurogroup session in Riga last week, where the country’s finance minister allegedly received a verbal battering from his European counterpart, Syriza’s leader Alexis Tsipras removed Yanis Varoufakis from the Eurogroup negotiation team when he reshuffled it.

Varoufakis has rubbed up his counterparts the wrong way with his repeated opposition to the austerity programme and as patience ran out with Greece, a sacrifice had to be made. The markets immediately reacted in a positive way to this news. However, this move amounts to not much more than shooting the messenger. Whoever represents Greece at the next Eurogroup still has to carry the Syriza government’s message.

And so on and so forth in this economic mess and its even messier handling. The mouthpiece has been changed, but the message will most likely be the same. Why is it that five years later, all we have on the table is Europe’s “austerity or nothing” and Syriza’s “a little bit of austerity or nothing”? It’s important to ask this, because whatever the treatment, it’s the patient, the Greek public that bears the brunt of it, and right now the patient’s vital signs are looking critical.

Maybe someone somewhere should listen carefully and give a voice to the equivalent of the nurse standing in a corner with an alternative solution.